Special Tax Alert
Yesterday, the IRS released new questions and answers (Q&As) without much fanfare providing information for C corporations that carry back net operating losses to pre-TCJA years in which the alternative minimum tax (AMT) applies. The Q&As answer some outstanding questions taxpayers and their advisors have had about the effects of carrybacks to AMT years, but also potentially raise new issues that cannot be resolved without further guidance.
AMT and the Minimum Tax Credit
Prior to TCJA, corporations, like other taxpayers, were subject to the AMT. The amount of the AMT was generally calculated as the excess, if any, of the taxpayer’s tentative minimum tax (TMT) over its regular tax for the taxable year. In the case of corporations, the TMT was calculated by multiplying the taxpayer’s alternative minimum taxable income (AMTI) by 20%. The AMTI is the taxpayer’s taxable income calculated with certain adjustments. One such adjustment is that instead of being entitled to a deduction for its regular tax net operating loss (NOL), the taxpayer is entitled to a deduction for its AMT net operating loss (ATNOL), which is discussed in greater detail below. Therefore, as a result of carrying back an NOL, a taxpayer may be subject to, or may increase the amount of, the AMT.
If a taxpayer has to pay AMT in a taxable year, then they are eligible for a minimum tax credit (MTC) in a subsequent year. The MTC is generally a non-refundable credit (i.e., taxpayers can offset their regular tax liability but not obtain a refund as a result of the credit). However, because the AMT is no longer being imposed on corporations, the TCJA, as further modified by the CARES Act, provides that corporations claim a refundable credit equal to their MTC either entirely in the taxpayer’s taxable year beginning in 2018, or 50% in the taxpayer’s taxable year beginning in 2018 and 50% in the taxpayer’s taxable year beginning in 2019.
Ability to Claim Non-refundable MTC
As noted above, when a taxpayer carries back an NOL, the taxpayer may be subject to, or may increase the amount of, the AMT that is imposed, which in turn generates an MTC. That MTC can be used in subsequent years to reduce a taxpayer’s previously paid tax (and generate a refund, although the MTC is still non-refundable). As discussed previously, the Form 1139 may be preferable because it is processed more expeditiously. However, the Form 1139 Instructions provide that an MTC that results from an NOL carryback cannot be claimed on the form and instead, a taxpayer has to file an amended return. The Q&A that was released yesterday changes this rule and provides that the Form 1139 can be used to claim the non-refundable MTC. The MTC refund can be claimed on the same Form 1139 used to claim a refund for the NOL carryback. This change is a taxpayer-favorable rule which will hopefully accelerate the time in which the taxpayer can receive its refund…